Franck Neel, president of the Oil and Gas Employers’ Federation (FPPG), answered Energynomics’ questions.
What is the current level of taxation in the oil & gas sector in Romania, in comparison to other countries? How did taxation evolve over the past two years?
According to an independent study developed in November 2023, “Analysis of the taxation system specific to the upstream sector of crude oil and natural gas in Romania”, carried out for FPPG, the fiscal burden falling on the oil & gas sector in Romania is extremely high compared to the level of taxation systems in Europe. In fact, Romania had the highest effective tax rate – that is specific upstream taxes/production revenues, among the analysed states, four times higher than the average identified for the years 2021 and 2022.
At the same time, specific taxation increased by 885% in the reference period. Additional taxation increased 11 times in 2022 compared to 2020, while royalties increased 5.2 times in 2022 compared to 2020.
From a quantitative perspective, a significantly disproportionate evolution of specific taxation for the period 2020-2022 can be observed.
The effective tax rate, calculated as the proportion of taxes specific to the upstream sector of crude oil and natural gas in Romania in total production revenues, increased from 16% in 2020 to ~29% in 2021, to ~43% in 2022, if the solidarity contribution is excluded, or to 52% in 2022, if the solidarity contribution is included.
According to the data analysed, the study also noted the excessive overlap of several taxation elements, as well as the introduction of new taxation elements without a recalibration of existing taxes.
The consequences are companies stopping their activities and leaving the Romanian market. The other large burden on gas producers is the complexity of the regulation that was created by several changes in law in the last years. We are facing for example obligation to supply at cap prices gas quantities for household consumers and heat producers for households, Gas Release Program, and we can add a storage obligation not necessary in line with our needs.
All these measures do not give incentives to invest in gas production, unfortunately.
Now, to put some more context around this, let me also highlight the role of the oil and gas sector in the development of the national economy. Another independent study – “The contribution of the oil and gas industry to the Romanian economy” developed in 2023, shows that the investments made by companies in the oil and gas sector in 2022 were 11 billion lei, the estimated investments for 2023 being similar.
How much tax did OMV Petrom pay in 2023, and what is expected in 2024? How about the dividend policy? How will all that affect future investments?
In 2023, OMV Petrom paid 16 bn lei to the state budget, almost 1 bn lei were dividends, and 15 bn lei direct and indirect taxes, including the solidary contribution of 1.5 bn lei.
In 2024, in addition to direct and indirect taxes, we will pay another 1.2 bn lei of solidarity contribution. Further to these, a new tax on revenues for companies operating in the oil and gas sector was introduced, applicable for 2024 and 2025, with an estimated annual impact of up to 250 mn lei for this year.
In terms of dividends, at the beginning of February, the company announced the Executive Board’s proposal of a gross base dividend of RON 0.0413/share for the 2023 financial year. This represents a 10% year on year increase, at the high end of the 5-10% range stated in the dividend guidance. In the same time, the company also announced the intention to propose a special dividend in 2024. Both of these proposals will be subject to approval in the General Meeting of Shareholders, in April for the base dividend and in a subsequent one for the special dividend. We remain committed to delivering a competitive shareholder return and deliver on our progressive dividend policy guidance.
Regarding future investments, the period 2024-2026 is expected to be the most investment intensive period in the history of the company, with annual investments of approximately 8 bn lei, more than double from the average 3.5 bn lei for the period 2017 to 2021, before we launched our Strategy 2030.
For 2024 alone, we plan investments of 8 bn lei, of which a large part will be directed to the Neptun Deep project, of course, but we also have other projects in the Petrobrazi refinery as well as the closing of our M&A transactions of low and zero projects.
We see oil&gas companies worldwide shifting towards green projects. What can you tell me about FPPG’s members, OMV Petrom included, investments in green projects done so far and in pieline? How about CE Oltenia projects, what is their stage of development now?
Indeed, the shift is visible and impactful on a global scale. Green technologies adoption is in focus for most companies in the oil & gas industry in Romania as well. Still, we need to bear in mind that all these new technologies cannot be implemented without innovation and allocation of large investments.
FPPG is committed to promoting the transformations needed to advance to a zero-emission economy, protecting the environment and encouraging innovation. Starting last year, we created a series of events – Viitorul Energiei (Future of Energy) – debating on the available new technologies world-wide and considering Romania’s opportunity for implementation. These events transformed into FPPG’s take on the Future of Energy and we aim at facilitating the understanding and implementation of modern technologies for Romania’s energy transition through workshops, policy papers and an education platform (https://viitorulenergiei.ro/).
So far, we have identified 10 main pillars that will underpin the energy sector in the future, including both established technologies and promising pioneering initiatives.
- Geothermal energy (closed loop system)
- Carbon Capture, Transport and Storage (CCS)
- Hydrogen
- Natural gas and biomethane
- Biofuels
- Hydrocarbons (Oil & Coal)
- Renewable Energy
- Offshore Wind
- SMR
- Hydro
The implementation of each technology requires the commitment and collaboration of all stakeholders, including industry, central and local authorities, and communities. The human and financial resources required are considerable, but the impact on Romania’s economy would be significant. It is essential to have the right legislative framework and to stimulate investment to ensure an efficient transition to these sustainable technologies, which will bring long-term benefits for both the environment and the country’s economic development.
It is still not understandable that we cannot inject biomethane in the gas grid in Romania versus other countries, when Romania has a large potential which will help to decarbonise the gas grid.
If Romania wants to achieve the net zero path, it is important also to address the current burdens that are slowing down the investments: permitting process, bureaucracy and timing to receive EU funds and moving to a liberalised market with dedicated protection for vulnerable customers to urgently simplify the current complex legislation and burdens for producers and suppliers and recreate a liquid market that will give market price signals for investors. We also highlight the need to comply with the EU directive on Guarantee of Origins, that is slowing down the objectives of the power market reform.
Now coming to OMV Petrom: in December 2021 we launched OMV Petrom Strategy 2030, with the purpose to deliver cleaner and sustainable energy. Our strategy is based on 3 pillars: transition to low and zero carbon, grow regional gas and optimize traditional business. For implementation, we estimated investments of 11 bn euro by 2030 – this is the largest investment plan supporting Romania’s energy transition. Out of the planned investments, 35% will finance low and zero carbon projects, such as photovoltaics, wind, hydrogen, biofuels and e-mobility.
In 2023 and beginning of 2024 we made significant progress with the strategy execution. Firstly, following the signing of the financing contracts to build 4 photovoltaic parks of 450 MW in partnership with CE Oltenia, the public tendering for the EPCC contract was launched. Secondly, the transaction to purchase 710 MW of installed capacity of photovoltaic power projects in Teleorman county in Romania is expected to be completed this year, and the parks to become operational 18 to 24 months later. And most recently, at the beginning of 2024, we announced a new partnership: to acquire a 50 percent stake in approximately 1 GW of capacity of renewable projects in Romania, out of which 950 MW of wind and 50 MW of photovoltaic capacity. The projects will be further developed, built and operated in partnership with Renovatio.
We have now a balanced portfolio, we expect to close in 2024 the announced M&A transactions – subject to regulatory approvals and we envisage gradually starting production this year.
We also see a lot of industrialists voicing concerns about the competitivity with non-EU companies when it comes to accelerating energy transition. What can be expected? Can we see gas still accepted also after 2030 as a transition fuel, or even as a main source for hydrogen?
There will always be a debate about the appropriate pace of the energy transition, but it’s clear that the trajectory is not for debate. However, energy transition cannot happen over the night, it’s a gradual process and requires a mix of solutions, including natural gas. This is essential for Romania’s successful energy transition due to its role in balancing renewables.
Natural gas will continue to play an important role even after 2030. Gas demand in Romania will continue to increase until 2030 driven by gasification of households and new gas powerplants – we have projects announced amounting to ~3,500 MW.
Natural gas will also play an important role even after 2030 – hydrogen is a use case for gas, for example.
The low carbon Hydrogen should be part of the Romania’s H2 Strategy, Romania being the largest gas producer in the EU by 2027, which will enable a competitive advantage for the Romanian industry.
What is your view on hydrogen development in Romania in general and hydrogen-based storage in particular? How do you see the development of car industry as regarding its main fuel for the future?
On the path to a low carbon economy, hydrogen will become an important area, especially after 2030. When it comes to green & blue hydrogen, Romania is well positioned due to its natural gas resources, as well as long oil & gas tradition, leading to depleted reservoirs that could offer options for CO2 storage.
Hydrogen development in Romania holds significant promise for fostering sustainable energy practices and driving innovation in various sectors. The utilization of hydrogen-based storage represents a pivotal step towards achieving cleaner energy sources and reducing carbon emissions.
In particular, hydrogen-based storage solutions offer versatility and scalability, enabling efficient energy storage and distribution across diverse applications. In Romania, embracing hydrogen technology can catalyse advancements in sectors such as transportation, manufacturing, and energy production, fostering economic growth while mitigating environmental impact.
As global efforts intensify to combat climate change and reduce dependence on fossil fuels, the automotive industry is poised for a transformative shift towards cleaner, renewable energy sources.
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This interview first appeared in the printed edition of Energynomics Magazine, issued in March 2024.
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